Does the Current State of the Business Cycle matter for Real-Time Forecasting? A Mixed-Frequency Threshold VAR approach

Markus Heinrich

EconStor Preprints from ZBW - Leibniz Information Centre for Economics

Abstract: Macroeconomic forecasting in recessions is not easy due to the inherent asymmetry of business cycle phases and the increased uncertainty about the future path of the teetering economy. I propose a mixed-frequency threshold vector autoregressive model with common stochastic volatility in mean (MF-T-CSVM-VAR) that enables to condition on the current state of the business cycle and to account for time-varying macroeconomic uncertainty in form of common stochastic volatility in a mixed-frequency setting. A real-time forecasting experiment highlights the advantage of including the threshold feature for the asymmetry as well as the common stochastic volatility in mean in MF-VARs of different size for US GDP, inflation and unemployment. The novel mixed-frequency threshold model delivers better forecasts for short-term point and density forecasts with respect to GDP and unemployment--particularly evident for nowcasts during recessions. In fact, it delivers a better nowcast than the US Survey of Professional Forecasters for the sharp drop in GDP during the Great Recession in 2008Q4.

Keywords: Threshold VAR; Stochastic Volatility; Forecasting; Mixed-frequency Models; Business Cycle; Bayesian Methods (search for similar items in EconPapers)
JEL-codes: C11 C32 C34 C53 E32 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-ets, nep-for, nep-mac, nep-ore and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.econstor.eu/bitstream/10419/219312/1/M ... ing-MF%20T%20VAR.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:zbw:esprep:219312

Access Statistics for this paper

More papers in EconStor Preprints from ZBW - Leibniz Information Centre for Economics Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().